Estimating the economic benefits of advances in computer technology
Brown, Kenneth Hackman
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Permalink
https://hdl.handle.net/2142/22729
Description
Title
Estimating the economic benefits of advances in computer technology
Author(s)
Brown, Kenneth Hackman
Issue Date
1994
Doctoral Committee Chair(s)
Greenstein, Shane M.
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, General
Language
eng
Abstract
Until recently, hedonic price indexes were the predominant method for measuring the improvements in price per performance for mainframe computers. These indexes showed that price per performance improved at roughly 20-25% over the past 30 years. However, little attention has been given to how well these indexes measure the benefits buyers receive from improvements in computer technology. Trajtenberg (1990) proposed an alternative measure which purports to measure the benefits from product innovation and applied his procedure to the computed tomography scanner industry. His results show that hedonic indexes understate the true benefits from improvements in technology in that industry. In this work we have proposed an alternative procedure which also measures the benefits which accrue to buyers from improving product technology. We find, in contrast to the results of Trajtenberg, that the hedonic index overstates the true benefits to buyers from product innovation in the mainframe computer industry.
In addition to the main result that the benefit index will most likely decline at a slower rate than the hedonic index, we found that the benefit index is sensitive to the distribution of buyers across the product space and to the level of the highest available quality. With regard to the distribution of buyers, we found that as the distribution of buyers shifted toward higher levels of quality, the benefit index declined at a faster rate. This implies that buyers purchasing high levels of quality must benefit more from price reductions and extensions in the product space than buyers purchasing low levels of quality. Therefore, industries in which most buyers are purchasing the highest level of quality available have buyers who benefit more from improving technology than industries where most buyers are purchasing low levels of quality. With regard to the level of the highest available quality, we found that as that level increased, the benefit index declined at a faster rate. This occurred because increasing this level effectively frees up a constraint for buyers and allows them to optimize when making a purchase decision. Thus, industries which see fast rates of growth in available quality levels have buyers who benefit more than industries where there is little or no growth in the highest available quality.
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